Brown-Forman Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended July 31, 2018, compared with the three months ended July 31, 2017, unless otherwise noted. Financial statements are unaudited. Amounts are in U.S. dollars.
Business context and performance
Brown-Forman sells beverage alcohol products, principally whiskey and other spirits, internationally and in the United States. Reported net sales grew 6% to $766 million; management’s non-GAAP underlying net sales growth was 9%, adjusting for foreign exchange, ASC 606 adoption, and estimated distributor inventory changes. Management estimated tariff-related customer buy-ins added approximately 2–3 percentage points to underlying sales growth.
| Metric | Q1 FY2019 | Prior-year quarter | Change or context |
|---|---|---|---|
| Net sales | $766 million | $723 million | Up 6% reported; 9% underlying |
| Gross profit / gross margin | $523 million / 68.2% | $493 million / 68.1% | Gross profit up 6%; margin up 0.1 percentage point |
| Operating income / operating margin | $264 million / 34.5% | $246 million / 34.0% | Operating income up 7%; 10% underlying |
| Net income | $200 million | $178 million | Up approximately 12% |
| Diluted EPS | $0.41 | $0.37 | Up 12% |
| Interest expense | $22 million | $16 million | Higher, principally reflecting an April 2018 bond issuance |
| Effective tax rate | 17.4% | 22.1% | Lower, primarily due to Tax Act-related effects and stock-based compensation tax benefits |
| Cash provided by operations | $126 million | $105 million | Up $21 million |
Growth was led by whiskey brands, including the Jack Daniel’s family and premium bourbon, and by tequila. Underlying sales increased 16% in developed international markets, partly reflecting tariff-related buy-ins; 11% in emerging markets; 2% in the United States; and 22% in Travel Retail, where order timing also helped. Whiskey and tequila underlying net sales rose 11% and 9%, respectively. Finlandia and wine underlying sales declined 10% and 3%.
Cash, debt, and liquidity
Cash and cash equivalents were $211 million at July 31, 2018, down $28 million from April 30. Operating cash flow was $126 million; investing activities used $25 million, including $23 million of property and equipment additions; financing activities used $122 million, including $76 million of dividends and net repayment of short-term borrowings. The company attributed the year-over-year increase in operating cash flow largely to lower discretionary pension contributions.
At July 31, short-term borrowings were $176 million, including $161 million of commercial paper, and long-term debt was $2.310 billion. The company reported an undrawn $800 million bank credit facility supporting its commercial paper program, which expires November 10, 2022, and stated that liquidity was sufficient for future financial commitments. Approximately 87% of cash was held by foreign subsidiaries and expected to be reinvested abroad, though the company was reassessing working-capital needs following U.S. tax reform.
The quarterly dividend declared was $0.158 per share. The board authorized up to $200 million in share repurchases from July 13, 2018, through July 12, 2019; no purchases under that authorization occurred through July 31.
Material changes, outlook, and risks
- Revenue accounting: ASC 606 adoption reduced opening retained earnings by $25 million, net of tax. For the quarter, the company reported that adoption reduced net sales by $10 million, operating income by $6 million, and net income by $4 million versus prior guidance. Management said the timing change was not expected to significantly affect the full year but could shift results between quarters.
- Fiscal 2019 outlook: Management continued to expect full-year underlying net sales growth similar to fiscal 2018. It expected slower sales and operating-income growth in the remaining quarters than in Q1, with Q1 growth benefiting from tariff-related buy-ins. The full-year ordinary-income tax rate was expected to be 21.1%.
- Costs and tariffs: Management expected retaliatory tariffs on American whiskey, net of mitigation, to weigh on results for the rest of the fiscal year, largely through cost of sales. It also expected mid-single-digit input-cost increases, including agave and wood, higher cost of sales growth than net sales growth, and lower gross margins for the remainder of the year.
- Other operating factors: Foreign exchange was a headwind expected to continue. Management expected the Q1 benefit from distributor inventory increases and the negative quarterly timing effects from ASC 606 to moderate during the rest of the year. Advertising expense increased as the company invested in American whiskey brands.
- Tax uncertainty: Tax Act transition amounts remained provisional, including the repatriation tax and deferred-tax adjustments; further adjustments could be recorded within the permitted measurement period.
- Contingencies and risks: The company reported no material accrued loss contingencies and did not expect pending litigation to have a material adverse effect. It guaranteed an importer’s bank facility, with approximately $4 million of actual exposure and a maximum possible exposure of approximately $10 million, subject to currency movements. Risks include tariffs and trade actions, currency movements, consumer and competitive changes, supply disruptions and costs, regulation, and dependence on continued growth of the Jack Daniel’s family of brands. No material changes to the 2018 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether tariff-related buy-ins materially pulled sales forward, particularly in Europe, and how subsequent consumer demand and distributor inventories compare.
- How retaliatory tariffs and mitigation actions affect American whiskey costs, pricing, sales volumes, and gross margins over the remainder of fiscal 2019.
- Whether full-year underlying net sales growth remains similar to fiscal 2018 and whether the expected 21.1% tax rate is achieved.
- How ASC 606 timing and classification effects compare with the company’s underlying measures; underlying growth is a non-GAAP measure and is not directly equivalent to reported GAAP growth.
- Cash generation, commercial paper levels, debt and interest costs, the use of the share-repurchase authorization, and the treatment of foreign-held cash.